Country risk modifications

Credendo Group downgraded twelve countries

In the framework of its regular review of short-term political risk classifications, Credendo Group has downgraded twelve countries (Albania, Dominican Republic, Gabon, Gambia, Greece, Hungary, Indonesia, Mauritania, Mozambique, Papua New Guinea, Tanzania and Vanuatu). No country has been upgraded.

For short-term political risk ratings, the global trend is negative again, even if the situation is not comparable with the 2008-2009 crisis. This negative trend is largely explained by the large downgrade of some African oil exporters (Angola, Nigeria and Gabon) and the continued deterioration of liquidity positions for CIS countries and, to a lesser extent, by the deterioration of commodity exporters in Asia and ongoing regional tensions in the Middle East. Looking ahead, countries with high reliance on commodities and on external financing might be downgraded in the coming months as their liquidity position is slowly deteriorating.

The systemic commercial risk classifications are updated three-times a year for all countries. Intermediary reviews are possible if necessary. The methodology ranks 246 countries* in one of 7 country classifications with ‘1’ being the most favourable, ‘7’ the worst

Albania: downgrade from 3 to 4

The short-term political risk has been downgraded from category 3 to 4 as current account receipts are expected to decrease this year amid lower oil prices (crude oil production began in 2011) and a sharp drop in remittances as two thirds of them are coming from Italy and Greece. As a result, foreign exchange reserves have slightly decreased and are expected to continue to decline in the coming months.

Dominican Republic: downgrade from 2 to 3

Being a net fuel importer, the Dominican Republic has greatly benefitted from the drop in oil prices. It is largely thanks to this price drop that the current account deficit dropped from 4.1% of GDP in 2013 (and around 7% in the prior three years) to 3.1% in 2014. This figure still implies a significant financing need, however, which the Dominican Republic has found difficult to meet. Short-term debt has edged up in recent months while reserves have declined. The latter now again represent less than three months of goods and services imports, indicating an elevated liquidity risk. This evolution, along with downside risk pertaining to the gradual tightening of international financing conditions, has urged Credendo Group to downgrade the Dominican Republic’s short-term political risk classification from category 2/7 to 3/7.

Gabon: downgrade from 3 to 4

Gabon, a member of the CFA zone, is hit by low international oil prices and falling production. Consequently, the 2015 current account is expected to turn into a deficit for the first time in sixteen years; at the same time, insufficient capital inflows are likely to force withdrawals from the shrinking foreign exchange buffer. Based on Gabon’s deteriorating liquidity position, its short-term risk classification was downgraded to category 4/7.

Gambia: downgrade from 5 to 6

Gambia’s export receipts fell by half as tourism inflows collapsed since Ebola broke out in Gambia’s neighbouring countries. Moreover, President Jammeh became more dictatorial, taking unpredictable measures that have been deterring investors and international donors. The fragile and aid-dependent economy’s liquidity position has tightened significantly, inciting a downgrade to category 6 for short-term political risk.

Indonesia: downgrade from 2 to 3

In a context of moderating growth at a 5-year low mainly due to sharply dropped commodity prices, Indonesia’s external short-term debt keeps rising, principally in US dollar among corporates. Therefore, Indonesia’s position is weakening given its vulnerability to pressures on the rupiah (at its lowest point since the Asian crisis) and capital outflows, faced with the upcoming US Fed rate increase. Foreign exchange reserves are still at a comfortable level and have been broadly stable in 2014, but are currently on a slow downward trend. Besides, the risk outlook remains clouded by the continued economic slowdown in China, a top driver for Indonesia’s commodity exports.

Though it is expected to record the world’s highest GDP growth this year thanks to a large LNG project, Papua New Guinea’s external liquidity position keeps deteriorating. Since 2012, foreign exchange reserves have been halved as a result of high capital goods imports and of lower commodity prices (LNG and copper above all). This notably impacts the country because it is largely reliant on commodities for its exports. The decline has been exacerbated by the government’s frequent interventions to defend the kina which has nevertheless lost a third of its value since 2013. Meanwhile, short-term external debt has been multiplied by three between 2013 and 2014, thereby further worsening the country’s liquidity ratios and justifying a downgrade of the short-term political risk rating.

*'Country' needs to be understood in a broader sense than as a synonym of ‘state’. Within the model framework, by ‘country’ is understood a clearly distinct geographical region for which a separate risk assessment is justified, regardless of a region's international political status.